Alex Tolbert: Understand health reform dynamics

Dec. 4, 2013

Gina Denis, not seen, a certified counselor at Miami's Boringuen Health Center, works with an unidentified Haitian client to sign her up for health insurance under the Affordable Care Act on Monday, Dec. 2, 2013. Floridians eager to sign up for health insurance through the federal government's troubled website worked their way through the process after officials fixed hundreds of software bugs and increased software capacity to handle 50,000 visitors at once. / J Pat Carter / Associated Press

Written by

Alex Tolbert

For The Tennessean

A cornerstone of health care reform is the introduction of government-run health insurance exchanges. Policies are available now to be purchased on the exchanges, and they can be effective as early as Jan. 1.

The federal government originally projected 7 million people would enroll in these new exchanges in 2014. It expected so many because of federal subsidies that make the policies more affordable, and because no one can be declined as a result of health issues.

In the first month of open enrollment, though, only about 100,000 people signed up.

Such low numbers lead many insiders to believe that only the sickest Americans are signing up. Some have expressed opinions that, if that does not change, the whole system could fall apart. For health care consumers, it is important to understand the dynamics of what is happening.

Idea behind exchanges

One problem health care reform was designed to fix was the problem of people being unable to purchase health insurance because of a pre-existing condition. Starting in 2014, that is no longer the case. No matter how high your medical expenses, insurers have to take you.

But this presents a different problem. If the insurers have to take everyone, then healthy people have less reason to buy insurance now, figuring that they can always get it later. If healthy people don’t buy, then the insurers will go bankrupt paying the claims of all the sick people. If the insurers go bankrupt, then no one will be able to buy insurance because there won’t be anyone selling it!

The government’s solution to this problem was to impose a financial penalty, later called a tax, on people who didn’t buy health insurance.

So, the idea is the insurers have to take everyone, and everyone has to sign up or else get taxed.

Why low numbers are problem

Industry insiders know that the first people to sign up for health insurance are the people who believe they are the most likely to need it. So, when they see low enrollment numbers, they generally expect that those who are enrolling are the sickest.

Given that experience, the fact that 100,000 people have signed up versus a projected 7 million indicates that the pool of enrollees is sicker than what was expected.

Why does that matter? Insurers need premium revenue from healthy people to offset the high cost of the claims they pay for people who do have high medical expenses. If healthy people don’t sign up, then the insurers will lose a fortune.

Why does it matter if the insurers lose a fortune? These companies have employees, vendors and other stakeholders they have to pay in order to survive. If they lose lots of money in the individual health insurance market in 2014, in order to protect their stakeholders they will have to either:

1. Exit the individual health insurance market, or

2. Raise the premium rates they charge for insurance.

If all the insurers exit the market, then no one will be able to buy insurance — again, no one will be selling it. If the insurers have to raise rates too high, then even fewer healthy people will sign up in 2015. The insurers would lose a lot of money again. Eventually, they would have to exit the market.

The federal government doesn’t want its increased involvement in health care to lead to a collapse of the system. So, what will it do?

The PCIP

The Pre-Existing Condition Insurance Plan was part of health care reform. First available in 2010 and funded in large part by the federal government, it was sold “guaranteed issue.” This meant one couldn’t be turned down because of pre-existing conditions. The government projected 375,000 people would sign up initially, but instead only 21,000 people did so. As it turned out, those who signed up had more expenses on average than the government projected.

In other words, what happened with the PCIP is similar to what we see happening right now with the exchanges. With the PCIP, the government reacted by shutting it down. Only so much money had been allocated to the program, so the government had to stop it.

Stakes are higher this time

With the exchanges, the stakes are higher this time. The government can’t afford to shut them down. This has caused some, such as U.S. Sen. Marco Rubio, to predict a “government bailout” of the health insurance industry. Similar to how the federal government recognized it to be in the national interest to protect the banking industry by bailing it out in 2008, Rubio recently predicted, the federal government will try to take steps via a mechanism called a “risk corridor” to protect the health insurance industry.

For health care consumers, this turmoil presents challenges and opportunities. Taking time to understand your options can be well worth it.

Alex Tolbert is the founder of www.bernardhealth.com/, a company that provides noncommissioned, expert advice on health, Medicare and COBRA insurance, and medical bill consulting. To learn more, visit www.bernardhealth.com/.